Monday, May 7, 2012

Bankers and lawyers said the proposals, if approved, would push up capital requirments and could making buying and selling assets – as opposed to holding them to maturity – far less profitable.

The proposal is expected to hit institutions with large trading desks, such as Barclays, Goldman Sachs and Deutsche Bank, particularly hard.

Higher capital requirements could also make it harder for some European banks to gain any advantage over their US rivals when they have to stop trading with their own capital under the US Volcker rule.

This should come as no surprise to those who have followed the academic literature on global banking regulations. It's basically following the playbook of an old article by Oatley & Nabors:

1. Financial distress in the U.S. leads to domestic calls for re-regulation.

2. Some of these regulations would put U.S. firms at a competitive disadvantage vis-a-vis their international competitors.

3. These regulations get extended into the international arena to shift some of the costs from American firms to their foreign competitors. The U.S. is able to do this because of their relative power within the global financial system.

It's nice when academic research actually helps us understand the world. Timely too, because Dani Rodrik wrote an op-ed arguing that this type of theorizing isn't any good:

The most widely held theory of politics is also the simplest: the powerful get what they want. Financial regulation is driven by the interests of banks, health policy by the interests of insurance companies, and tax policy by the interests of the rich. ...

It’s the same globally. Foreign policy is determined, it is said, first and foremost by national interests – not affinities with other nations or concern for the global community. International agreements are impossible unless they are aligned with the interests of the United States and, increasingly, other rising major powers. ...

Yet this explanation is far from complete, and often misleading. Interests are not fixed or predetermined. They are themselves shaped by ideas – beliefs about who we are, what we are trying to achieve, and how the world works. Our perceptions of self-interest are always filtered through the lens of ideas.